Rental real estate is a hot commodity across the entire country. Since this is a continuing trend, it makes sense to consider rental properties. But what if you don’t want to invest in a new property? Maybe you should think about converting your home into a rental. Here’s what you’ll need to consider:
- There may be a few issues that need to be remedied prior to renting. Fix the quirks making your home safer for future renters.
- Your insurance needs will change. Start comparing costs of landlord insurance policies now.
- Do you want to manage a rental property by yourself? It may not seem like much, but issues can snowball quickly. You may want to bring in a pro.
In addition, if you have been thinking about refinancing your home, do it now. Talk to your lender about your options because it’s usually more difficult and expensive to refinance a rental property compared to a primary home.
So, after reviewing the above, you may feel pretty confident about jumping into the rental business. But you should really consider if this is a good move for you. There are some substantial and pretty obvious upsides to owning a rental. For starters, you can definitely make money. You also get to keep a home that can add to your net worth. And some even use their first rental to learn the ins and outs of the business and then expand into owning multiple properties, commercial buildings and more.
But there are plenty of potential downsides as well. Mostly in the shape of risks. These are very realistic issues that could arise at any time:
- You end up leasing to terrible tenants who won’t pay any rent and trash your property inside and out.
- The real estate market crashes (either locally or nationwide)
- An unforeseen major repair is required and you don’t have the funds to pay for it.
- Your work or family changes and you are no longer able to manage the rental personally, OR
- Your work or family changes and you are now required to manage the rental property
- The government changes tax codes in the future that remove some of the highly favorable breaks.
Most landlords will face a few of these issues during their time of managing a property. The risk comes with the territory. So even if none of these derail your plan to become a landlord, they are risks you need to recognize.
So, what’s next? Converting your home into a rental of course! Sometimes, a rental will not only require physical changes, but legal changes as well. So spend time studying your local rental market. That way, you are able to work out what the physical changes should be. Whether it’s a new layout, landscaping, water features, or extended driveways, you should cater to your market.
For example, if you are trying to attract high-end professionals, that normally comes with premium rent. In this case, you may need upgrades that will appeal to this specific group. New lighting, appliances, tile flooring, or even including lawn maintenance in your lease. Just make sure you don’t spend so much that it takes you years to get a return on your investment.
Or your might be able to attract tenants who aren’t very likely to respect your former home. Plan to your market accordingly and start putting in protections. For instance, cover hardwood floors with cheap but durable carpeting. Consider taking nicer appliances with you and replacing with more utilitarian options. The changes you make should reflect the reality of the rental market that surrounds your property. Not a pie in the sky hope and dream.
As an owner and landlord, you may be liable for accidents on your property due to the condition of the property. You should consider umbrella insurance. Additional insurances can make all the difference when you need to make a claim for any of YOUR possessions you left behind; appliances, lawn equipment, etc. And, in some states, it could be worth forming a limited liability corporation as a shield. You should also require that your tenants carry renters insurance for their own belongings. This can help avoid future claims of responsibility for theft or damage of tenant personal property. Here’s a list of things you can do that may help prevents claims from arising in the first place:
- Get a professional electrician to run safety checks on all electrical circuits.
- Have the HVAC / furnace serviced and checked annually.
- Install and maintain smoke detectors and, if gas is used, carbon monoxide detectors.
- Sort out any trip hazards inside your home as well as out in the yard.
- Fence around any hazards; drops, retaining walls, sea walls, high grades, etc.
- Get a professional to examine your roof making sure shingles are secured properly, or tiles are not damaged.
As a landlord, you will never be able to prevent every accident. But you can take reasonable steps to make sure the home and property is as safe as possible. In addition, you can screen potential renters to see how many lawsuits they have filed. Some tenants may make a career out of suing.
You probably have a rough idea of how much time you’ll have to spend on being a landlord. Now double it. Being a good landlord is a full time job and the reality is that it’s very time consuming. Your time is not alleviated after you are done finding good tenants. You still need to field emergency maintenance calls in the middle of the night if something goes wrong. Keeping up with paperwork and collecting rents aren’t always as easy as it should be. You’ll have to work hard to get good tenants in from the start.
Of course, you can delegate to professionals as well. Most professionals will take a cut from each months rent, and at the first quote, it may seem like a steep price to pay. But keep in mind, these companies are filled with professionals and they know property management. If you can sacrifice some of the monthly rent, a professional may be the way to go. Especially if you are not handy, not patient, or have an emotional connection to your home.
Being a landlord is tough work. But if you are willing to sacrifice the time and get your hands dirty, it can be very rewording. For any questions, tips, tricks or help, we are here for you. Call us for any and all rental needs.